As the world grapples with the COVID-19 situation unfolding, I wanted to let you know that the team at Mercia are committed to helping our clients through what will likely be difficult and challenging times ahead.

Below is a summary of stimulus measures released so far:

1. PAYG Refund in your BAS up to maximum of $100,000 calculated automatically by the ATO:
   1. Stage 1 Payment – March quarter – 100% of the PAYG amount withheld, up to a maximum of $50,000. Eligible employers that pay salary and wages will receive a minimum (tax-free) payment of $10,000, even if they are not required to withhold PAYG tax. Monthly lodgers will be eligible to receive three times the actual amount withheld.
   2. Stage 2 payment – For employers that continue to be active, an additional (tax-free) payment will be available in respect of the June to October 2020 period, basically as follows:
      1. Quarterly lodgers will be eligible to receive the additional payment for the quarters ending June 2020 and September 2020, with each payment being equal to 50% of their total initial (or Stage 1) payment (up to a maximum of $50,000).
      2. Monthly lodgers will be eligible to receive the additional payment for the June 2020, July 2020, August 2020 and September 2020 activity statement lodgements, with each additional payment being equal to a quarter of their total initial (or Stage 1) payment (up to a maximum of $50,000). Stage 2 payment June & Sep quarter – Quarterly lodgers will be eligible to receive the additional payment for the quarters ending June 2020 and September 2020, with each payment being equal to 50% of their total initial (or Stage 1) payment (up to a maximum of $50,000).
   3. The ATO will automatically calculate and pay the additional (tax-free) payment as a credit to an employer upon the lodgement of their activity statements from July 2020, with any resulting refund being paid to the employer
2. Payroll tax – Businesses paying payroll tax, with a payroll between $1 million and $4 million will receive a one-off grant of $17,500, and certain businesses can apply for a deferral of their 2019-20 payroll tax payment
3. Trainee grant – 40% of wage from 1.1.20 to 30.9.20 to a maximum of $21k per employee
4. Instant asset write off $150k to 30 June 2020
5. Accelerated depreciation 50% upfront deduction and balance depreciated up to June 2021.
6. 6 months payment relief on any BAS.
7. Vary PAYG instalments In March quarter to Nil and get refunds for Dec 2019 and Sep 2019 PAYG with no penalties for the 2019-20 year.
8. Remitting any interest and penalties after 23 Jan 2020.
9. Finance:
   1. To enhance the ability for SMEs to obtain loans from lending institutions, a 50 per cent Government guarantee will be provided to SMEs for new unsecured loans to be used for working capital.
   2. A 6 month loan repayment holiday to be provided. Contact your bank or Dan at Mercia Finance on 0414 423 340.
10. Super retirees – Pension minimum payments reduced by 50% for 2020. Currently minimum drawdown is 4$-14% of pension balance, 65-95 and over.
11. $550 increase to individual job seeker payments, contact us for more. Deeming rates on financial investments to reduce from 3 to 2.25% (higher deeming rate) and 1 to 0.25% (lower deeming rate).
12. Early access to super on compassionate grounds extended for COVID-19 consequences.  For example, unemployment.
13. $750 for any welfare recipients e.g. part a and b on 31 March, second $750 payment on 13 July

For the full detailed version Click the link here.

We are now working securely from home, which we have previously trialed with success.  All staff have secure login access to work, so working from home for us is not a problem.  Our work telephone messages go to our emails so we are able to get your voicemail within minutes of you leaving a message.

If you do need to drop anything off to the office during this time, please just call or email ahead to ensure we will be there to open the office.
 
So it’s business as usual for the team at Mercia Taxation and Accounting,  or as close as it can be given the circumstances.
 
If you have questions please do not hesitate to email or call any one of us.
 
Regards
 
Richard

Super guarantee loophole closed

A superannuation guarantee loophole that allowed employers to use salary sacrificed contributions to make up part of their required super guarantee contributions has been closed. From 1 January 2020, employers must make the full amount of mandatory super guarantee contributions and cannot use salary-sacrificed amounts to reduce those mandatory contributions. Depending on the types of employment agreements between employees and employers, this could mean more money for employees’ retirement.

The concept of super guarantee – the requirement for employers to contribute 9.5% of an employee’s salary or wages into a nominated super account – should be familiar to everyone, particularly anyone who is an employee, as it makes up the bulk of future retirement income. Employees may also be salary-sacrificing amounts of their salary and wages to put extra into their super.

Before this year, a loophole in the law meant that an employee’s salary-sacrificed amounts could be counted towards employer contribution amounts. This allowed a potential reduction in employers’ mandated super guarantee contributions – essentially working against the employee’s intention to add extra to their super. In addition, employers were able to calculate their super guarantee obligations on the lower, post-sacrifice earnings base.

Depending on the type of employment agreement between an employee and employer, this meant that if the employee salary-sacrificed an amount equal to or more than the super guarantee amount the employer was required to pay, the employer could have chosen to not contribute any non-sacrifice amount and the legal requirements of the super guarantee would still be met. It’s important to note that this was not the original intention of the law, and not all employers would make the choice to exploit this loophole; however, where they did, employees who salary-sacrificed could be short-changed and end up with lower super contributions as well as a lower salary overall.

The law has now been changed specifically to close this loophole. From 1 January 2020, amounts that an employee salary-sacrifices to superannuation cannot be used to reduce the employer’s super guarantee charge, and do not form part of any late contributions the employer makes that are eligible for offset against the super guarantee charge. To avoid any possible shortfall in their mandatory super guarantee contribution payments, employers must now contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying super fund. The OTE base consists of the employee’s OTE and any amounts they sacrifice into superannuation that would have been OTE if the salary-sacrifice arrangement wasn’t in place.

The following simple example illustrates the effect of the old law versus the new law for an employee with an OTE base of $15,000.

Source: Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Act 2019.

ATO tackling international tax evasion

Australian tax residents are taxed in Australia on their worldwide income. While most do the right thing and declare all their income, some try to avoid paying tax by exploiting secrecy provisions and the lack of information-sharing between countries. As the world becomes more interconnected and barriers are broken down, it is inevitable that there are fewer places for the unscrupulous to hide from tax.

With the rise of the global economy and easy flow of money across borders, no country is immune to international tax evasion and money laundering. A recent coordinated effort with Joint Chiefs of Global Tax Enforcement (J5) shows that member countries, including Australia, are doing all they can to protect their tax revenue. This most recent investigation yielded evidence of tax evasion by Australians using an international institution located in Central America.

Tax chiefs from the J5 countries met in Sydney on 17–21 February 2020 to share information about common mechanisms, enablers and structures that are being exploited to commit transnational tax crime. The J5 was initially formed in 2018 to fight global tax evasion and consists of the tax and revenue agencies of Australia, United Kingdom, United States, Canada and the Netherlands. The countries share intelligence on international tax crime as well as money laundering.

The current international investigation started on information obtained by the Netherlands, which led to a series of investigations in multiple countries and concerned an international financial institution located in Central America whose products and services are believed to be facilitating money laundering and tax evasion for customers across the globe.

J5 members believe that through this institution, a number of clients may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime. The enforcement action consisted of evidence, intelligence and information-collecting activities such as search warrants, interviews and subpoenas.

According to the ATO, several hundred Australians are suspected of participating in these arrangements. The ATO is currently proceeding with multiple investigations with support from the Australian Criminal Intelligence Commission (ACIC). In addition, it is encouraging anyone with information about the scheme or other similar arrangements to contact the ATO.

ATO Deputy Commissioner and Australia’s J5 Chief, Will Day, has said, “this multi-agency, multi-country activity should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime”.

While the J5 is a powerful tool, it is by no means the only one in the ATO’s arsenal. The ATO also has a network of international tax treaties and information exchange agreements with over 100 jurisdictions, and uses them to identify facilitators such as banks, lawyers and financial advisers. Once a pattern has been identified, such as a practitioner with a large number of clients using the same methods to avoid or evade tax, the ATO is likely to look closely at the entire client base.

In recent years over 2,500 exchanges of information have occurred, enabling the ATO to raise additional tax liabilities of $1 billion. The message from the ATO is that anyone with offshore income or assets is better off declaring their interests voluntarily. Those who do so may have administrative penalties and interest charges reduced.

It’s important to keep in mind that holding offshore assets is not just for the wealthy. Australians with migrant backgrounds may not even know they hold offshore assets in some cases, but those assets are still subject to tax law. For example, grandparents or other relatives may start a bank account in an Australian’s name in another country to make contributions celebrating a holiday, birthday or other life event.

Source: www.ato.gov.au/Media-centre/Media-releases/Global-tax-chiefs-undertake-unprecedented-multi-country-day-of-action-to-tackle-international-tax-evasion/.

New measures to combat illegal phoenixing

New laws are now in place to target illegal phoenixing of companies, which by some estimates costs businesses, employees and governments more than $2 billion a year.

While there is no Australian legislative definition of “illegal phoenixing” or “phoenixing activity”, at its core it is understood as the use of serial deliberate insolvency as a business model to avoid paying company debts. To combat this, the new laws target a range of behaviours, including preventing property transfers to defeat creditors, improving accountability of resigning directors, allowing the ATO to collect estimates of anticipated GST liabilities and authorising the ATO to retain tax refunds.

Property transfer to defeat creditors

New criminal offences and civil penalty provisions will apply to company officers who fail to prevent the company from making “creditor-defeating dispositions”, and to other persons (including pre-insolvency advisers, accountants, lawyers and other business advisers) who facilitate a company making a “creditor-defeating disposition”. Liquidators and the Australian Securities and Investments Commission (ASIC) can seek to recover the assets for the company’s creditors, and in some cases creditors can recover compensation from a company’s officers and other persons responsible for making a “creditor-defeating disposition”.

A “creditor-defeating disposition” is defined as disposing of company property for less than its market value (or less than the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. To ensure legitimate businesses aren’t affected by this wide definition, safe harbour has been maintained for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement.

Accountability of resigning directors

In order to reduce the instances of unscrupulous directors using loopholes to shift the blame, the new laws seek to prevent abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight. Practically, under the new laws, a director cannot resign or be removed by a resolution of company members if doing so would leave the company without a director (unless the company is being wound up).

In addition, if the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation is deemed to take effect from the day it is reported to ASIC. However, a company or director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.

Collection of anticipated GST liabilities

Under the new laws, the ATO can now collect estimates of anticipated GST liabilities, including luxury car tax (LCT) and wine equalisation tax (WET) liabilities. The ATO can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities.

Retaining refunds

The new laws also allow the ATO to retain a refund to a taxpayer where that taxpayer has other outstanding lodgements or needs to provide important information.

Source: Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth).

Insurance payouts: are they taxable?

In recent months, parts of Australia have been battered by a combination of fire and floods. As people try to piece their lives together in the aftermath, insurance payouts can go a long way in helping rebuild homes and replace lost items. However, if you receive an insurance payout in relation to your business, home business or rental property you need to be aware there may be associated tax consequences.

For example, if you rent out your home or a portion of your home on a short stay website, you may be subject to capital gain tax (CGT) if you receive an insurance payout in relation to that home. Businesses that receive an insurance payment may be subject to varying tax consequences depending on what the payment is designed to replace.

Insurance payouts relating to personal property (including household items, furniture, electrical goods, private boats and cars) and your main residence are not taxed. If you keep a home office or run a business from home and you receive an insurance payout in relation to the property being damaged or destroyed, there may be CGT consequences.

Similarly, if you have a rental property or rented out a room of your main residence which later becomes damaged or destroyed and is subject to an insurance payout, you will need to include the insurance payout amount when you work out whether you have a capital gain or loss. This applies even if you were casually renting out a room, your home or (part of) your farm as short-stay accommodation.

For those operating a business, the tax consequences of an insurance payout are even more complicated depending on what the money received is for. For example, destroyed business premises come with CGT consequences, while any insurance amount you receive for repair of damage will need to be included in your assessable income.

If an amount is received in relation to damaged or destroyed trading stock, it must be included as assessable income. For any depreciating assets used in generating assessable income (eg office equipment), you will need to calculate the difference between the amount received from insurance and the asset book value of the asset at the time it was destroyed. Any excess needs to be included as assessable income, while a deduction can be claimed for any losses.

For depreciating assets in the low-value pool, you will need to reduce the closing pool balance by the amount of insurance payment you receive. In addition, the tax treatment will need to be modified if an asset was partly used to produce assessable income and in a low-value pool.

The tax treatment of insurance payments for work cars is similar to that of depreciating assets, except if you used the logbook method for claiming car expenses. If you used the logbook method, the balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.

Businesses that correctly informed their insurer of their GST status when they took out the insurance don’t have to pay GST on insurance payout amounts and may be entitled to GST credits for purchases made with those amounts. Small businesses may also be entitled to CGT concessions.

Source: www.ato.gov.au/individuals/dealing-with-disasters/damaged-or-destroyed-property/.

Australia’s independent tax complaints investigator

Do you know who to turn to when you have a complaint about the ATO? Whether you’re an individual or business, the Inspector-General of Taxation and Taxation Ombudsman (IGTO) should be your first port of call. The department has two distinct, yet intertwined, functions.

As the Taxation Ombudsman, the IGTO provides all taxpayers with an independent complaints investigation service. One of the main roles of the IGTO is that it must investigate complaints by taxpayers (or their representatives) where a tax official’s actions or inactions, decisions or systems have affected them personally. As the Inspector-General of Taxation, it also conducts reviews and provides independent advice and recommendations to government, ATO and other departments.

The difference between the two functions is that the Taxation Ombudsman’s investigations and recommendations are likely to be made privately, whereas when the office conducts reviews (not in response to a complaint) as the Inspector-General of Taxation, the investigations and recommendations are public and aimed at improving administration of the tax law.

In the first quarter of 2019–2020 the IGTO received 909 complaints – a 14% increase over the number for the same period in 2018–2019. Of the complaints received so far this year, 82.4% of the complaints received were from self-represented individuals, of whom approximately 10-12% were small business taxpayers. Taxpayers who had a representative were largely represented by a family member or friend, although around a third were represented by an accountant or a tax practitioner.

The top five issues raised in complaints for the quarter remain largely the same as the previous year, covering debt collection, payments to the taxpayer, lodgement and processing, communication, and audit and review. According to the IGTO, issues surrounding debt collection have featured consistently among the complaints lodged since the assumption of the Tax Ombudsman service.

While the IGTO has direct access to ATO officers, records and systems, it cannot investigate how much tax needs to be paid, provide advice regarding structure of tax affairs or assist with decisions made by other government agencies apart from the Tax Practitioners Board. The IGTO can investigate and assist taxpayers with issues including:

• extensions of time to pay;
• the ATO’s debt recovery action;
• delays with processing tax returns;
• delays in ATO communication and responses;
• information the ATO has considered regarding taxpayers’ matters;
• understanding the ATO’s actions and decisions; and
• identifying available options and other relevant agencies that can help.

Taxpayers can approach the IGTO at any stage of their dispute with the ATO, although it is recommended that they first approach the ATO officer/manager assigned to their case, followed by the ATO complaints section, before lodging a formal IGTO complaint.

Complaints can be made online and via phone or post, and services are offered in languages other than English as well as for people who are hearing, sight or speech impaired. The IGTO will require:

• basic personal information including the taxpayer’s tax file number (TFN);
• the main facts, relevant dates and supporting documents;
• an explanation of how ATO actions have caused concern and how those actions have affected the taxpayer; and
• information about what the taxpayer or their representative has done to try to resolve the complaint, the result to date, and the desired outcome from the complaint.

Source: www.igt.gov.au/.

ATO scrutiny on car parking fringe benefits

The ATO has started contacting certain employers that provide car parking fringe benefits to their employees to ensure that all fringe benefits tax (FBT) obligations are being met. Generally, car parking fringe benefits arise where the car is:

• parked on the business premises of the entity providing the benefit;
• used by the employee to travel between home and their primary place of employment and is parked in the vicinity of that employment;
• parked for periods totalling more than four hours between 7 am and 7 pm; and
• a commercial parking station located within 1 km of the premises charges more than the car parking threshold amount.

Employers that meet these conditions are providing parking benefits and have a choice of three methods to calculate the taxable value of the benefits: the commercial parking station method, the average cost method and the market value method.

The method currently under ATO scrutiny is the market value method, which states that the taxable value of a car parking benefit is the amount that the recipient could reasonably be expected to have to pay if the provider and the recipient were dealing with each other under arm’s length conditions. When using this method, the employer must obtain a valuation report from an independent valuer who has expertise in the valuation of car parking facilities and is at arm’s length from the employer.

TIP: Specifically, the ATO is looking at employers that have engaged an arm’s length valuer as required under the market value method. According to the ATO, it has information that valuers in some instances have prepared reports using a daily rate that doesn’t reflect the market value and as such, the taxable value of the benefits is significantly discounted or even reduced to nil.

The ATO notes that just engaging an arm’s length valuer does not mean you’ve met all the requirements for working out the taxable value of the car parking fringe benefits. It is the employer’s responsibility to confirm the basis on which the valuation is prepared and examine any valuation that is suspected to be incorrect or considerably reduces FBT liability.

At a minimum, the ATO requires a valuation report to be in English and to detail the following:

• the date of valuation;
• a precise description of the location of the car parking facilities valued;
• the number of car parking spaces valued;
• the value of the car parking spaces based on a daily rate;
• the full name of the valuer and their qualifications;
• the valuer’s signature; and
• a declaration stating the valuer is at arm’s length from the valuation.

In addition to the valuation report, an employer also needs a declaration relating to each FBT year that includes the number of car parking spaces available to be used by employees, the number of business days, and the daily value of the car parking spaces.

Source: www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Valuing-car-parking-fringe-benefits/.

Foreign residents and the main residence exemption

Laws limiting foreign residents’ ability to claim the capital gains tax (CGT) main residence exemption are now in place. This means that if you’re a foreign resident at the time of disposal of the property that was your main residence, you may not be entitled to an exemption and may be liable for tens of thousands in CGT. Some limited exemptions apply for “life events”, as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.

The restrictions apply to any person who is not an Australian resident for tax purposes at the time of disposal (ie when the contract is signed to sell the property).

According to the ATO, a person’s residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.

For current foreign residents, there may still be time to act. You can still claim the CGT main residence exemption if, when the CGT event happens to your property, you were a foreign resident for tax purposes for a continuous period of six years or less and during that time one of the following “life events” happened:

• you, your spouse, or your child under 18 had a terminal medical condition;
• your spouse or your child under 18 died; or
• the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreement.

Further, if you purchased your main residence before 7:30 pm (AEST) on 9 May 2017, you may still be entitled to the exemption provided you sell your home on or before 30 June 2020, subject to satisfying other existing requirements for the exemption. If you miss the 30 June window for disposal of the property in 2020, you will not be entitled to the main residence exemption unless one of the listed “life events” occurs within a continuous period of six years of becoming a foreign resident.

Similarly, for properties acquired at or after 7:30 pm (AEST) on 9 May 2017, the CGT main residence exemption will not apply to disposals from that date unless certain “life events” occur within a continuous period of six years of the individual becoming a foreign resident.

It’s important to note that these changes apply even if you die – if you’re a foreign resident for tax purposes at the time of your death, the same foreign resident restrictions will apply to your legal personal representatives, the trustees and beneficiaries of deceased estates, any surviving joint tenants and special disability trusts.

Since this law change is retrospective, the ATO requires foreign residents who acquired property at or after 7:30 pm (AEST) on 9 May 2017 to review their positions back to the 2016–2017 income year and seek tax return amendments where necessary. Foreign residents who purchased their property before 7:30 pm (AEST) on 9 May 2017 and who then dispose of their property after 30 June 2020 will only need to review their positions to the 2020–2021 income year.

The ATo has said it will not apply shortfall penalties and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. Additionally, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend their assessments within a reasonable timeframe of the law cming into force.

Source: www.ato.gov.au/general/capital-gains-tax/international-issues/Foreign-residents-and-main-residence-exemption/.

Warning to watch out for myGov and ATO tax scams

The government’s stay Smart Online website (www.staysmartonline.gov.au/) warns taxpayers that there is a surge in scammers impersonating trusted bodies like myGov and the ATO to trick people into giving them money or personal details. These scams can take the form of emails, text messages and fake myGov login pages.

In June 2019, the ATO received 6,444 reports of tax-time scams that impersonated the ATO. Emails with links to fake myGov login pages were the most widespread email scam in that month.

The trend in scammers demanding ‘debt’ payments via gift cards is also on the rise, with Australians aged 18–44 years making the majority of iTunes payments to scammers ($94,420 in June alone), closely followed by Google Play cards ($27,993).

If someone is unsure about the validity of a tax-related message or phone call, they can contact the ATO Scam Hotline on 1800 008 540.

Stay Smart Online reminds that:

• myGov will never send anyone a text, email or attachment with links or web addresses that ask a person for their login or personal details. Do not click on links in emails or text messages claiming to be from myGov.
• People should always log into their official myGov account to check their tax, lodge their return and check if they owe a debt or are due a refund. Do this by manually typing https://my.gov.au/ into the internet browser.
• Unfortunately, ATO and other scams continue well beyond the 30 October deadline for tax returns, as scammers know many people are waiting for a refund or debt owed. It’s important to watch out for scams throughout the year.

Source: www.staysmartonline.gov.au/alert-service/watch-out-mygov-tax-scams

Tax time updates

ATO has refunded $10 billion so far

The ATO says that $10 billion has been refunded to Australian taxpayers so far this tax time, an increase of over $2 billion from the same time last year, with most returns being processed in under two weeks.

ATO Assistant Commissioner Karen Foat has highlighted that the ATO seeks to process returns as soon as possible, announcing that over four million refunds have already been sent out, compared to over three million refunds issued this time last year.

“Of course, the ATO works around the clock to quickly get refunds in peoples’ hands”, she said. “However, there are some things that taxpayers should take care with to ensure their return is not unnecessarily delayed.

“Firstly, it’s important to check your bank account details are correct, and if you’ve changed accounts recently, take a moment to update your details.

“When refunds get sent to incorrect bank accounts, redirecting them to your new account will take more time. This tax time, we’ve seen some people who are really keen to get their refund, having missed this important step.”

Another big obstacle getting between some people and their return is forgetting to declare some income. Common things people forget to include are rental income, bank interest and government allowances or payments. This is particularly a risk if your tax return was lodged before the ATO’s pre-fill was available.

Source: www.ato.gov.au/Media-centre/Media-releases/$10-billion-back-in-your-hands/.

ATO watching for undisclosed foreign income

The ATO has reminded taxpayers who receive any foreign income from investments, family members or working overseas to make sure they report it this tax time.

New international data-sharing agreements allow the ATO to track money across borders and identify individuals who are not meeting their reporting obligations.

“This year, the ATO has received records relating to more than 1.6 million offshore accounts holding over $100 billion, and is now using data-matching and sophisticated analytics to identify foreign income that has not been reported”, Assistant Commissioner Karen Foat has said.

Under the new Common Reporting Standard (CRS), the ATO has shared data on financial account information of foreign tax residents with over 65 foreign tax jurisdictions across the globe. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets and other income.

“Australians that deliberately move cash overseas in an attempt to hide it should be concerned. Hiding your assets and income offshore is pointless. ‘Tax havens’ are becoming a less effective model as international agreements improve transparency. You can no longer hide money behind borders.”

The ATO also states that apart from a small number of individuals deliberately engaging in tax avoidance, it is concerned about a large number who are unsure of how to meet their obligations.

“If you’re an Australian resident for tax purposes, you are taxed on your worldwide income, so you must declare all of your foreign income no matter how small the amount may be. This may include income from offshore investments, employment, pensions, business and consulting, or capital gains on overseas assets”, Ms Foat said.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-watching-for-foreign-income-this-Tax-Time/.

Unusual claims disallowed

The ATO has published information about some of the most unusual claims it has disallowed. For example, around 700,000 taxpayers claimed almost $2 billion of “other” expenses including non-allowable items such as dental costs, child care and even Lego sets.

Assistant Commissioner Karen Foat has said a systematic review of claims has found, and disallowed, some very unusual expenses. “These claims add up to a lot of money”, she said. “If the deduction isn’t directly related to earning income, we can’t allow it.”

“A couple of taxpayers claimed dental expenses, believing a nice smile was essential to finding a job, and was therefore deductible. It isn’t!”

“Another taxpayer claimed the Lego sets they bought as gifts for their children. Unsurprisingly, this claim was disallowed.”

The “other” deductions section of the tax return is for expenses incurred in earning income that don’t appear elsewhere on the return – such as income protection and sickness insurance premiums. However, the ATO’s review found some taxpayers were incorrectly claiming a range of private expenses such as child support payments, private school fees, health insurance costs and medical expenses, all of which are not allowable.

“Where people make genuine mistakes, we simply disallow the claim. But when people are deliberately making dishonest claims, particularly for large sums, we will disallow the claim and may impose a penalty”, Ms Foat said.

Finally, the ATO reminds taxpayers that in order to claim an “other” deduction, the expenses must be directly related to earning your income, and you need to have a receipt or record of the expense. If the expense relates to your employment, it should be claimed at the “work-related expenses” section of the return.

Source: www.ato.gov.au/Media-centre/Media-releases/No-smiles-as-dental-expenses-rejected/.

ATO contacting small employers about Single Touch Payroll

From 1 July 2018, employers with more than 20 employees were required to provide real-time reports to the ATO of salary and wage payments, super guarantee contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this Single Touch Payroll (STP) reporting system has extended to all employers.

The ATO has announced it will soon write to small employers (those with up to 19 employees) who have not yet started reporting or applied for a deferral, to remind them of their STP obligations.

Small employers have until 30 September 2019 to start reporting or apply for extra time to get ready. The ATO will grant deferrals to any small employer who requests additional time to start STP reporting.

There will be no penalties for mistakes, or missed or late reports, for the first year, and employers experiencing hardship or who are in areas with intermittent or no internet connection will be able to access exemptions.

The basics of STP reporting

• Each employer needs to report their employees’ tax and super information to the ATO on or before each payday, or authorise a third party such as a registered agent or payroll service provider to report on their behalf. They need to send the information from STP-enabled payroll software.
• When STP reporting is in place, employers no longer need to provide payment summaries to their employees for the payments reported and finalised through STP. Payments not reported through STP, such as employee share scheme (ESS) amounts, still need to be reported on a payment summary.
• Employers no longer need to provide payment summary annual report (PSARs) to the ATO at the end of the financial year for payments reported through STP.
• Employees can view their year-to-date payment information using the ATO’s online services, accessible through their myGov account. They can also request a copy of this information from the ATO.
• Employers need to complete a finalisation declaration at the end of each financial year. The information reported through STP will not be tax-ready for employees or their tax agents until the employer makes this declaration.
• Employers need to report employees’ superannuation liability information – as usually provided to the employees on their payslips – for the first time through STP. Super funds will then report to the ATO when the employer pays the super amounts to employees’ funds.
• From 2020, the ATO will pre-fill activity statement labels W1 and W2 for small to medium withholders with the information reported through STP. Employers that currently lodge an activity statement will continue to do so.

Sources: www.ato.gov.au/Tax-professionals/Newsroom/Digital-interaction-with-us/Contacting-small-employers-about-STP/; www.ato.gov.au/Media-centre/Articles/Transition-to-Single-Touch-Payroll-for-small-employers/; www.ato.gov.au/stpsolutions.

Disclosing business tax debt information: ATO consultation

The ATO has released a consultation paper, The ATO’s administrative approach to the disclosure of business tax debt information to credit reporting bureaus.

In its Mid-Year Economic and Fiscal Outlook in 2016–2017, the Federal Government announced that it would change the law so the ATO could report business tax debt information to credit reporting bureaus (CRBs) where a business consistently does not engage with the ATO to manage a tax debt. It is not currently authorised to report information about tax debt avoidance, because the law contains strict confidentiality requirements for ATO-held taxpayer information.

The ATO has said it “recognises the important role businesses play in the Australian economy [but] when an entity avoids paying its tax debts it can have a significant impact on other businesses, employees, contractors and the wider community.”

The new paper aims to facilitate the consultation process between the ATO, businesses and CRBs, and focuses on the administrative approach the ATO proposes to take once the legislative changes are in place. It also helps explain some aspects of the changes under the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 (which has passed the House of Representatives without amendment and is currently before the Senate) and the draft legislative instrument, the Draft Taxation Administration (Tax Debt Information Disclosure) Declaration 2019).

If passed in its current form, the Bill will amend the Taxation Administration Act 1953 (TAA 1953) to allow taxation officers to disclose information about business tax debts to CRBs when certain conditions and safeguards are satisfied. The business in question would need to have debt of at least $100,000 overdue by more than 90 days, and have not effectively engaged with the ATO to manage that debt.

The consultation paper sets out the following key practical points:

• Implementation – Under the ATO’s phased implementation approach, the changes will be implemented gradually to ensure that systems, safeguards and processes are robust.
• Whose tax debt may be reported? – The ATO will be permitted, but not required, to report tax debt information about an entity to CRBs where it meets all of the following criteria:
• the entity has an ABN and is not an excluded entity (the ABN and excluded entity test);
• the entity has one or more tax debts totalling at least $100,000, and the amount has been due and payable for (overdue by) more than 90 days (the debt threshold test);
• in determining whether the entity has debts that meet the debt threshold test, the ATO must exclude tax debt amounts that the entity has engaged with the ATO to manage (the effective engagement test); and
• the entity must not have an active complaint with the Inspector-General of Taxation concerning the proposed reporting or reporting of the tax debt information.
• How will businesses be notified? – If all of the reporting criteria are met and the ATO intends to report an entity’s tax debt information to CRBs, the ATO will notify the business in writing at least 21 days before reporting its tax debt information for the first time. This is to allow an additional 21 days for the business to take action (e.g. by engaging with the ATO and/or paying the debt) to prevent its tax debt information from being reported.
• What will be reported? – If a business’s tax debt information is reported to CRBs, the ATO will provide the CRBs with the following:
• unique identifiers for the entity, such as the ABN and legal name;
• the balance of the entity’s overdue tax debts at the time of first reporting;
• regular updates on the balance of the entity’s overdue tax debt until the entity no longer meets the reporting criteria; and
• a notification when the entity no longer meets the reporting criteria.

Source: www.ato.gov.au/General/Gen/Consultation-paper–ATO-s-approach-to-disclosure-of-business-tax-debts/.

Cross-border recovery of tax debts

The ATO has recently updated and reissued Practice Statement Law Administration PS LA 2011/13 Cross border recovery of taxation debts. This practice statement outlines the options available in relation to recovering a tax debt where the debtor is outside Australia, and sets out how the ATO deals with requests from other countries for assistance in recovering a tax debt owing to the other country.

It covers:

• the ATO’s ability to require payment under Australian tax legislation from debt-holders who are overseas (ie the ATO’s garnishee powers);
• trustees’ and liquidators’ ability to recover debts in a foreign jurisdiction, and how the ATO can assist;
• the ATO’s ability to obtain judgment in a foreign jurisdiction to recover debts in that jurisdiction;
• the ATO’s ability to request assistance from foreign jurisdictions.

The ATO may use an exchange of information (EOI) to assist domestic information-gathering and decide which recovery method to use. This can be used when:

• the ATO has no visibility over a debtor’s offshore affairs, and
• the ATO has exhausted domestic options to source the information or verify the debtor’s claims.

The ATO can request assistance from foreign jurisdictions in regard to debt recovery through:

• bilateral treaties with individual jurisdictions that allow for assistance with collection; and
• the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI BEPS), to which multiple jurisdictions are signatories.

The practice statement was originally issued on 14 April 2011, and the updated version is effective from 15 August 2019.

Source: www.ato.gov.au/law/view/document?docid=PSR/PS201113/NAT/ATO/00001.

ATO superannuation focus areas

The ATO has released its presentation to the 2019 Association of Superannuation Funds of Australia (ASFA) National Policy Roadshow outlining emerging superannuation focus areas for 2019–2020. Topics covered included:

• the taxation of compensation received by super funds;
• pension tax bonuses;
• successor fund transfers; and
• the treatment of inactive low-balance accounts.

The ATO also noted the following real-life examples of people interacting with their super in 2018–2019:

• compassionate release of super – the ATO processed more 53,000 applications for the early release of super on compassionate grounds to members who required the money for critical purposes such as medical care and treatment, and it released $456 million as a result;
• Aboriginal and Torres Strait Islander assistance – ATO representatives visited Darwin, Kununurra and Broome with the First Nations Foundation and helped find $4.37 million in lost super for members of those communities;
• downsizer contributions – 4,900 individuals aged 65 and over made super contributions from the proceeds of selling their home, to a total value of $1.1 billion;
• first home super saver (FHSS) scheme – in the first year of the FHSS scheme’s operation, 3,300 people obtained a release of money from their super to purchase their first home, to a total value of $39.4 million.

Lost super

The ATO noted that at 2 July 2019 it held 5.39 million super accounts worth $3.98 billion. Of this money, the ATO estimates it will be able to reunite $473 million with 485,000 fund members using the Protecting Your Super measures (which have been enacted under the recently passed Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019).

The ATO encourages fund members to find out about their lost and unclaimed super through ATO Online via myGov. In 2018–2019, fund members consolidated or transferred over 537,000 accounts worth $4.38 billion using myGov.

Pension cap indexation

The ATO flagged that the pension transfer balance cap (TBC) of $1.6 million could increase on 1 July 2020 or 1 July 2021, depending on when the consumer price index (CPI) number reaches 116.9 (its level was 114.8 as at June 2019). The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 provides that the general TBC is indexed in increments of $100,000 when the indexation rate reaches a prescribed figure (which is calculated using a formula set out in the law).

While the ATO does not expect indexation to occur until at least 1 July 2021, it is important to consider what the TBC increase this may mean for funds and members. Once the indexation takes place, there will no longer be a single personal TBC that applies to all super members with a retirement phase income stream. Instead, there could be a personal TBC for each member, depending on their individual situation and arrangements. The ATO said it will advise as soon as possible if indexation will apply on 1 July 2020.

Source: https://www.ato.gov.au/Media-centre/Speeches/Other/Superannuation—a-system-in-transition/.

Compassionate release of super only available in limited cases

The ATO has recently seen a significant increase in calls from individuals who were encouraged by their super funds to contact the ATO because they were ineligible for compassionate release of super (CRS). However, in the majority of cases, the individuals concerned were ineligible because they were looking to use their super to pay for general expenses. It is important to note that CRS is only an option for the following expense types:

• medical treatment and transport costs;
• palliative care costs;
• a loan payment to prevent the loss of one’s home;
• costs of modifying a home or vehicle, or buying disability aids, needed because of a severe disability; or
• expenses associated with the death, funeral or burial of a dependant.

The expense must not yet have been paid (eg using a loan, a credit card or money borrowed from family or friends), and the amount of super a person can withdraw is limited to what they reasonably need. There are a range of eligibility conditions for each expense type, set out in detail on the ATO website. Any amounts released early on compassionate grounds are paid and taxed as normal super lump sums.

Source: www.ato.gov.au/Super/APRA-regulated-funds/In-detail/News/Five-grounds-for-compassionate-release-of-super/; www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Access-your-super-early/?page=2#Access_on_compassionate_grounds.

Personal services income rules: unrelated clients test

The Federal Court has set aside an Administrative Appeal Tribunal (AAT) decision that income derived by a business analyst through a company was subject to the personal services income (PSI) rules: Fortunatow v FCT [2019] FCA 1247 (Federal Court, Griffiths J, 12 August 2019).

Background

The taxpayer was a business analyst and the sole director of Fortunatow Pty Ltd. He provided his services through the company to various large organisations such as government departments, universities, banks and utilities. In the 2012 and 2013 income years, the company disclosed income of approximately $166,000 and $121,000 respectively from the provision of his personal services to eight different clients. The company did not pay him any remuneration and he returned no income in his personal tax returns for those years.

The company transferred income generated by the taxpayer’s personal services to a family trust, characterising the amounts as “management fees”. These fees were claimed as tax deductions, effectively reducing the company’s taxable income to nil. The trust income was offset against the trust’s rental losses. As a result, the taxpayer, the company and the family trust all paid zero tax on the income generated by the personal services the taxpayer supplied as a business analyst in 2012 and 2013.

The ATO concluded that the PSI rules in Div 86 of the Income Tax Assessment Act 1997 (ITAA 1997) applied to include all of the income received by the company in the taxpayer’s assessable income for 2012 and 2013. The taxpayer, however, argued that Div 86 did not apply because the unrelated clients test in s 87-20 was satisfied, and therefore the income was from conducting a personal services business.

Under s 87-20 of ITAA 1997, the relevant services must be provided as a direct result of the individual or personal services entity (PSE) – the company, in this case – making offers or invitations (eg by advertising) to the public to provide the services. The individual (or PSE) “is not treated … as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity” (s 87-20(2)).

The AAT (in Fortunatow and FCT [2018] AATA 4621) decided, in favour of the ATO, that the work the taxpayer obtained and carried out in the relevant years was through an intermediary. According to the AAT, the taxpayer was not operating a genuine business as an independent contractor because he, in effect, received referrals from intermediaries (recruitment companies) and allowed those intermediaries to take responsibility for obtaining and dealing with customers.

The issues for determination on appeal were whether the taxpayer made any offers or invitations to the public at large or to a section of the public to provide his services (the fourth element of the unrelated clients test) and, if so, whether the services to the unrelated entities were provided as a direct result of the taxpayer making those offers or invitations (the fifth element of the unrelated clients test).

The taxpayer argued he met the fourth element because of his active profile on LinkedIn and his marketing by word-of-mouth at industry functions. Although the AAT accepted that the taxpayer’s advertising on LinkedIn constituted the making of an offer or invitation to the public, it concluded that the law operates in a way that means the fourth element (and therefore the fifth element) was not satisfied.

Decision

The Federal Court held that the AAT had misconstrued s 87-20(2) of ITAA 1997 and misapplied its interaction with s 87-20(1)(b). In the Court’s view, the exclusion or exception in s 87-20(2) did not apply where there was evidence that the taxpayer (or the company) advertised his services to the public or a segment of the public through a forum such as LinkedIn, and also obtained work through the involvement of an intermediary.

According to the Court, simply because an individual or PSE is able to provide services through an intermediary, such as a recruitment or similar agency, does not constitute the making of an offer or invitation for the purposes of s 87-20(1)(b). More than that is required for the purposes of the unrelated clients test. But that does not mean that the exclusion in s 87-20(2) necessarily applies, as found by the AAT, where an individual or PSE is in fact available to provide personal services through such an intermediary and there is evidence (as in this case) that the individual or PSE has taken other steps to make offers or invitations to the public at large or a section of the public to provide the services.

The Court remitted the matter to the AAT for further reconsideration according to law, as it was not appropriate for the Court itself to resolve the issues remaining in dispute. It said the issues were not straightforward and there was uncertainty about the extent to which the misconstruction may have affected the AAT’s fact-finding.